The European Central Bank may hike interest rates next month, far earlier than markets expected, though any rise would not signal a series of increases, President Jean-Claude Trichet said on Thursday. The strong indication that a rise will come in April shocked markets expecting a move late this year and put the ECB in pole position to hike well before the US Federal Reserve and even the Bank of England, which analysts had expected to move first.
-- Says any rise not necessarily start of series of hikes
-- ECB sees inflation above forecast this year, not next
"The position of the Governing Council is that an increase in interest rates at the next meeting is possible," Trichet told a news conference after the central bank left rates at a record low 1.0 percent. A firm majority of economists polled by Reuters after the news conference said the ECB would raise rates next month.
Trichet dismissed the idea that a rate rise in April could be bigger than 25 basis points, saying such a scenario was "not the appropriate interpretation". The euro soared as Trichet spoke to as high as $1.3976, its strongest since November 8, putting it on track to test the psychologically important $1.40 level.
Asked whether a potential rate rise in April would signal the start of a round of hikes, Trichet said: "It is certainly not the sense of the start of a series of rate hike increases." Trichet said the ECB would exercise "strong vigilance" over rising inflation, deploying a phrase that in the past signalled a rate rise was only a month away.
"Strong vigilance is warranted with a view to containing upside risks to price stability," he said. The ECB used that phrase repeatedly during its 2005-2007 rate hike cycle, typically one month before it raised rates, although there were exceptions to that rule. Trichet said an April rate rise was not certain but sounded notably hawkish. In his opening statement, he also pointedly did not say that rates were at an appropriate level, saying price pressures had increased since the ECB last met a month ago, largely due to a rise in commodity prices, and that risks were on the upside.
Euro zone inflation accelerated to 2.4 percent last month, moving further above the ECB's target of just below 2 percent. In a fresh set of forecasts, ECB staff forecast euro zone inflation would overshoot the central bank's target this year, but to fall back to below the 2 percent upper limit in 2012. Trichet said staff expected inflation to be 2.0-2.6 percent in 2011 and between 1.0 and 2.4 percent in 2012, for a mid-point of 1.7 percent that year.
Trichet also said the central bank would carry on providing unlimited funding for banks at its three-month operations for the next three months and would keep full allotment at its weekly and one-month operations, until at least Jul. 12. By signalling its readiness to raise rates while keeping support in place for banks, the ECB tailored its policy to address growing inflation pressures while keeping in place measures to help lenders in weaker euro zone economies. Winding down the support measures could have left banks in countries like Portugal vulnerable to a squeeze if EU leaders fail to come up with a comprehensive package to tackle the euro zone's sovereign debt crisis at their Mar. 24/25 summit.
A weak deal at the summit could turn debt markets more negative on the bloc's peripheral economies, further delaying the central bank's exit from crisis liquidity measures. German resistance to boosting the rescue fund has heightened uncertainty about the summit outcome. Trichet has called for European leaders to give the rescue fund, the European Financial Stability Facility (EFSF), maximum flexibility in both size and scope.